This is in response to your letter requesting an opinion
regarding the application of section 7(i) of the Fair Labor Standards Act
(FLSA) to payments made to membership directors employed by your client, a
private health club/fitness facility. You seek this opinion for employment in
states other than California. Our response will cover the application of the
FLSA in all states, including California. Note, however, that no provision of
the FLSA preempts a state law or municipal ordinance that provides greater
benefit to employees. See 29 U.S.C. § 218(a) (copy enclosed).

You state that your client runs a health club/fitness facility and explain the duties of the membership directors as enlisting
members and selling them additional services. Membership directors must: meet
production goals; conduct presentations and tours of the facilities; discover
prospective members’ fitness goals, motivation for joining, and objectives;
develop leads and solicit referrals; and provide other customer services and
engage in other sales related activities. The health club/fitness facility is
a for-profit establishment that sells memberships to the general public. Your
client receives more than 75% of its annual sales volume from the sale of
services that are not for resale. In another letter regarding this employer,
you state that you believe your client “is clearly a service establishment.”

You describe the payment of membership directors as a mixture that includes (a) a base pay amount, (b) commissions, (c) a draw against commissions, and (d) bonuses. The fitness club pays its membership directors on a semimonthly basis (the 7th and the 22nd of the month) as follows:

On the first payday they receive (a) base pay for the second half of the preceding month,
and (b) a draw that will be counted against commissions earned from the previous month.

On the second payday they receive (a) base pay for the first half of the current month, and (b) commissions earned from the previous month (less the amount of the
draw they received on the first payday of the month).

You also state that the amount of the draw remains the same each month, but do not discuss the relative amount
of the draw compared to the amount of the commissions earned. You also do not provide information about how the “base pay” is determined (for example,
whether it is based on a salary or an hourly rate) or the amount of the base pay relative to the commissions.

You further state that the membership directors’ “commission” payments may include one quarterly and two monthly bonuses:

Quarterly incentive bonuses based on sales in excess of the quarterly quota;

A “performance bonus,” which is a fixed dollar amount paid to the employees with the highest sales in the month and the highest overall “closing” rate for the month; and

A “pooling bonus” that varies from month to month. You state that each club has a specific “target” for the month and that, if the target is met, a pool of between $1,000 and $2,000 is distributed among the membership directors according to each individual’s contribution toward meeting the goal for the month.

Lastly, you state that the regular rate of pay for membership directors exceeds one and one-half times the minimum wage rate and
that more than half of their compensation for a representative period of at
least a month consists of “commissions/bonuses” on services. Although your
letter does not provide sufficient detail to perform the calculations needed to
verify that the requirements are met, the following guidance is provided to
assist your client in making the calculations needed to determine the exempt
status of each membership director.

The application of the section 7(i) exemption to individual
employees depends in part upon their specific earnings. See 29 U.S.C. §
207(i) (copy enclosed). Accordingly, we cannot opine about the exemption based
upon the general earnings information you provide. That would require specific
earnings information for each employee. However, we can explain how to
evaluate the types of payments your client makes to its employees to determine
whether they qualify for the exemption.

To qualify for the section 7(i) exemption from the overtime provisions of the FLSA, three conditions must be met:

The employee must be employed by a retail or service establishment;

The employee’s regular rate of pay must exceed one and one-half times the applicable minimum wage under section
6 of the FLSA; and

More than half of the employee’s total earnings in a representative period must consist of commissions on goods or services.

It is the employer, not the employee, who must satisfy the
first element of this test. See 29 C.F.R. § 779.411 (copy enclosed).
In order to qualify as a “retail or service establishment” under section 7(i),
an employer must engage in the sale of goods or services, at least 75% of the
annual dollar volume of sales of goods or services must not be for resale, and
the sales must be recognized as retail sales or service in the particular
industry. Id. The health club/fitness facility engages in the
sale of health and fitness services. Additionally, sales of these services are
not for resale, so the second requirement is met. Finally, health club/fitness
facilities are recognized as retail service establishments because they

service the everyday needs of the community,

are at the end of the distribution stream,

do not take part in the manufacturing process, and

provide services for the comfort and convenience of the public by opening membership to members of the general public.

29 C.F.R. § 779.318 and Field Operations Handbook § 21b03(a) (copies enclosed). Therefore, it is our opinion that the health club/fitness facility qualifies as a retail or service establishment.

The final two elements of section 7(i) depend upon payments to the employees and not the establishment for which they work. To qualify as
a commission, payments must be based on the provision of “goods or services
which the establishment sells.” 29 C.F.R. § 779.413(b) (copy enclosed). “The
whole premise behind earning a commission is that the amount of sales would
increase the rate of pay. Thus, employees may elect to work more hours so they
can increase their sales, and in turn, their earnings. When a commission plan
never affects the rate of pay, the purpose behind using a commission rate also
fails.” See Erichs v. Venator Group, Inc., 128 F. Supp. 2d 1255, 1260
(N.D. Cal. 2001) (quoting Herman v. Suwannee Swifty Stores, Inc., 19 F.
Supp. 2d 1365, 1371 (M.D. Ga. 1998)). Note that all of the compensation plans
found in 29 C.F.R. § 779.413(a) “except for the ‘straight salary or hourly
rate’ may qualify as ‘bona fide commission’ plans under §207(i).” Viciedo
v. New Horizons Computer Learning Ctr. of Columbus, Ltd., 246 F. Supp. 2d
886, 896 (S.D. Ohio 2003). Straight salary and hourly payments do not qualify
as commissions.

Over the representative period, the employer must ensure that the employee’s commissions represent more than half the employee’s total
pay. See 29 C.F.R. § 779.417 (copy enclosed). Analysis of the various payments made to your client’s membership directors indicates some, but not all, qualify
as commissions under section 7(i).

The base payment is clearly not commissions, whether paid on
an hourly or a salary basis. The performance, pooling, and quarterly incentive
bonuses, whether individual or group, will qualify as commissions under section
7(i), provided they are based on the level of sales of health and fitness services.

A straight commission with draws qualifies as a commission
if it results “from the application of a bona fide commission rate.” 29 U.S.C.
§ 207(i). The proportion of commission payments and the amount paid as a draw
against future earnings must be closely scrutinized by the employer to assure
this requirement is met. As explained in the regulations, a commission plan is
not bona fide if, in fact, the formula for computing commissions is such that
an employee always earns the same fixed amount of compensation each pay
period. If an employee’s commission seldom or only infrequently exceeds the
draw, serious doubts would arise regarding the substance of the commission
agreement. The relationship of draws to commissions is specifically discussed
at 29 C.F.R. § 779.416 (copy enclosed). See WH Opinion Letters July 14, 1982, and April 24, 1998 (copies enclosed). If the individual employee’s
commission meets the requirements listed above, it is our opinion that the
membership directors’ compensation plan would comply with the requirements of
section 7(i).

This opinion is based exclusively on the facts and
circumstances described in your request and is given based on your
representation, express or implied, that you have provided a full and fair
description of all the facts and circumstances that would be pertinent to our
consideration of the question presented. Existence of any other factual or
historical background not contained in your letter might require a conclusion
different from the one expressed herein. You have represented that this
opinion is not sought by a party to pending private litigation concerning the
issue addressed herein. You have also represented that this opinion is not
sought in connection with an investigation or litigation between a client or
firm and the Wage and Hour Division or the Department of Labor. This opinion
is issued as an official ruling of the Wage and Hour Division for purposes of
the Portal-to-Portal Act, 29 U.S.C. § 259. See 29 C.F.R. §§ 790.17(d),
790.19; Hultgren v. County of Lancaster, 913 F.2d 498, 507 (8th Cir. 1990).